Obama’s Next Tax: Wealthy Can Kiss Deductions Goodbye

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Should Washington overcome its gridlock, America’s next tax hike will likely burst through the backdoor. It won’t be nearly as simple as the rate increase in this month’s fiscal cliff deal.

Democratic and Republican lawmakers each previewed their thinking about digging into the guts of the tax code during the past week. Neither party agrees on the rationale for re-writing rules that all told are ten times the length of the Bible.

Democrats seek more money to pay down some of the deficit and offset the budget sequestration cuts that are set to begin in March. They’re focused on extracting hundreds of billions of dollars over the next decade from the usual suspects—the top 1 percent, corporate jetsetters, and big oil companies. All three were named in a memo released Thursday by Senate Budget Committee Chairwoman Patty Murray, D-Wash.

“Republicans know that our tax code is riddled with giveaways for the wealthiest Americans and biggest corporations,” Murray wrote. “The alternative to raising additional revenue is spending cuts so large that they would be devastating to middle class families who have already sacrificed so much.”

House Speaker John Boehner and his deputies would second the idea that it’s time to end the giveaways. They floated the offer to close $800 billion worth of tax breaks during the fiscal cliff negotiations, part of a grand bargain that never happened.

But they want to rewrite the rulebook and lower rates as much as possible so that the total revenue collected doesn’t change. Even if revenues continue as is, on an individual level, an edited tax code would predictably lead some Americans to pay more and others less.

As part of a broader overhaul of the tax code expected later this year, Republicans on the House Ways and Means Committee released a draft report last week on changes to reform how financial derivatives—such as those tied to the financial crisis—would be taxed.

Committee staffers said the impact on the budget from any of their proposed reforms had not been scored yet, since there are individual pieces that would be working together as a whole. But their belief is that the Democratic focus on credits and loopholes is “Tax 101,” whereas they intend to dig deeper by rewriting the entire rulebook in a way that goes beyond looking at the usual tax breaks.

These two conflicting goals of tax reform—deficit reduction versus simplification—appear to be insurmountable for the moment. But President Obama and Republicans on Capitol Hill are still optimistic that something will happen on taxes despite their own tortured past.

House Budget Committee Chairman Paul Ryan, R-Wisc., told The Fiscal Times that he really doesn’t know how any deal would come together, but “if we start moving, that might open up a field of possibilities.”

So all talk by lawmakers at this point is speculative. But the talk will definitely continue as both sides try to resolve their differences on the budget and deficit before sequestration begins in March, the continuing resolution to fund the government expires on March 27, and the debt ceiling returns from a congressionally-ordered hiatus on May 19.

By its own admission, the Obama administration won’t propose anything new.

“The President has submitted a proposal,” White House press secretary Jay Carney said at a briefing last Thursday. “He has put forward significant spending cuts and additional revenues gleaned from tax reform and closing of loopholes and capping of deductions that would significantly go beyond, in terms of size, the sequester.”

Obama’s 2013 budget request included multiple tax increases that are still on the table:

That exact level is not carved in stone, because the fiscal cliff deal set the top marginal rate at 39.6 percent on household incomes above $450,000. The Murray memo indicated that “hundreds of billions of dollars” would be raised.

But the basic gist is that deductions would not be measured at the top 39.6 percent rate, but at a much lower 28 percent so that tax bills would essentially be going up for this group.

* Institute the Buffet Rule named after the “Oracle of Omaha,” billionaire investor Warren Buffett. It requires that those earning $1 million pay a minimum tax rate of 30 percent. This would generate $47 billion over 10 years, according the congressional Joint Committee on Taxation.

*Hit hedge funds and private equity managers by taxing their profits as ordinary income, instead of as capital gains. That produces $13 billion in the next decade.

* End tax preferences for oil and gas companies to raise another $41 billion over 10 years.

* Make the depreciation schedule for corporate jet less generous, adding another $2 billion in revenues over 10 years.

So this would obviously be bad news for Rex Tillerson, based on his salary and perks as the CEO of the oil company Exxon Mobil. But what would it mean for you?

The Murray memo makes it clear that the target is the top 1 percent of earners. So based on IRS data, that’s roughly the 1.35 million Americans who make more than $389,252. This group already accounts for more than 37 percent of the revenue the government collects.

As for the middle class, the Democrats make the argument that these tax hikes will spare them some of the cuts that are need to stabilize the deficit. The Murray memo points point that 80 percent of the deficit reduction thus far came from the spending side, with $2.45 trillion over ten years being cut through the 2011 Budget Control Act.

“We need to make sure,” the memo concludes, “that as we work to tackle our budget challenges, we aren’t cutting the long-term investments in our workers, our businesses, and our communities that will help our economy continue to recover and grow from the middle out.”